Morgan Stanley failed to settle the options contracts in an effort to “limit its liability,” Oasis said in a lawsuit filed in London in July.

What supposedly happened was Oasis bought options to sell Sino-Forest for C$19 on May 12.

Then about three weeks later, Sino-Forest's stock price plummeted after short seller Carson Block's research firm Muddy Waters said in a report that Sino-Forest had overstated its timberland holdings. Shares of the Hong Kong- and Mississauga, Ontario-based timberland company have dived 74% since June 1 -- the day before the report was released.

In order to settle the suit, Morgan Stanley would have to pay Oasis C$7.5 million, Bloomberg reports, citing the hedge fund's court filing.

The filing also said that the put options are valued at C$9.5 million compared with C$2 million for the equivalent shares, the report said. Back in May, Oasis claimed it paid Morgan Stanley a premium of C$770,000 for the options.

Oasis also alleges that Morgan Stanley claimed that the options were terminated because trading in Sino-Forest's shares was suspended.

Canadian regulators halted trading in shares of Sino-Forest on August 26, saying the Hong Kong- and Mississauga, Ontario-based timberland company may have engaged in fraud.

Oasis also said Morgan Stanley offered C$3.8 million to cancel the deal.